Of Starhub’s ENORMOUS debt explained
Note: All data mentioned in this article can be found in this spreadsheet over here.
I get this alot and to tell you the truth, I did ignore Starhub in the past because of this. The debt is enormous!
2009 Long Term Debt = 605 mil
2009 Assets = 1732 mil
2009 Equity = 125 mil
Debt to Equity Ratio = 605/125 = 4.85 times !!!!!
This is enough to put off investors since a high debt company is a dangerous company to own.
It is likely that they will face alot of refinancing problems in the future and they will refinance at a higher cost thus eating into the investors dividends.
I was in this discussion at Channelnewsasia forum on this topic and was asked what is Starhub’s take on their so called debt situation.
since i am not the best person to answer this question, i contacted Starhub’s Investor Relations and Ms Jeannie Ong was kind enough to explain to me:
The question i post:
Good day to you. What I notice is that compare to othe Singapore telcos, starhub’s short term debt + long term debt is so massive that it dwalfs the equity by 2 times.
the concern is that in view of so many companies facing problem with refinancing their existing debts, how does starhub manage the risk there?
if I am not wrong starhub’s policy is for debt to be 1.8 times of ebitda. Does that mean that the gauge to measure debt risk for starhub is through this metric?
The answer from Ms Jeannie:
When banks lend to the StarHub Group, it looks at the Parent Co – StarHub Ltd’s shareholders equity because all borrowings are arranged centrally.
At the Company level, the Shareholders fund and reserve stands at $1.24 billion.
Group Gross Borrowings and net borrowings (net of cash) is $661m.
Hence traditional Net Debt / shareholders fund is only 0.53 ratio.The Group Shareholders funds which is at $125m is after the consolidation and elimination of the investment in SCV of $1.174 billion on merger accounting of 2005. Hence the consolidated equity would not reflect the current cashflow and financial strength of the Group.
The Group Net Debt/ EBITDA ratio is used to track our long term capital management direction. Currently it is at a healthy 1.02 times.
Here is a snapshot from their 2009 annual report
The right side figures are the figures consolidated at the Company levels, while the right side is at the Group levels.
Notice the difference in the share holders equity. Now i really am not an accountant by training and it brought a realisation that had i been stronger in my knowledge of balance sheet i would not have the need to ask her.
If what she says is valid, then 681 mil in debt / 1241 mil in equity will come up to a 0.50 times debt to equity ratio. Which is on par with M1 Limited.
Analyzing the risk using Free Cashflow cover
There is another way of looking at it. Sure 605 mil is a large amount. Surely much larger than M1′s 250 mil.
But how much is 605 mil actually. To put it in perspective:
2009 Starhubs Operating Cashflow = 692 mil
This is more than Starhub’s entire long term debt.
2009 Starhub’s Capex = 231 mil
Jeannie have given a forcast that capex is likely to be more in 2010 at about 300 mil
2009 Starhub’s Divdiend payout = 316 mil
This is on 18 cents dividend. The 2010 forecast is a 20 cent dividend which comes up to 347 mil
If we calculate the Free Cashflow, which is Operating Cashflow – Capex,
692mil – 231 mil = 461 mil
This 461 mil is what Starhub can choose to either pay dividend or pay off debts.
So how many years does it take to pay off 605 mil?
If starhub cuts dividend by half, which is 9 cents dvidends (around 3.5% yield at $2.34) they will take 605mil/(461-150) = 2 years to pay off 605 mil
If starhub cuts dvidend all the way to zero, they will take 605 mil / 461 mil = 1.3 years to pay it off.
Conclusion
Whichever way you look at it I think Starhub’s management of this mathematically shows they are doing a much better job than M1.
Sometimes we trust the ratios we use too much. its only when we examine closely do we really put things into perspective. Do correct me if i made a wrong analysis
Related posts:
- Starhub Q2 2010 Results:Declining Earning Escalating Costs
- M1 Full Year Results 2010: Paying out more than free cashflow
- A closer look at Starhub
- Pertama Holdings: Cash Rich Dividend Stock with Zero Debt Average Yielding 5%
- Starhub and Singtel results inline
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Comments
DNHH this is the first time i come accross something like this. well not the first but MIIF balance sheet is rather confusing as well.
I would think that after some time these should be reconciled back to the group, but it isn’t. Have you come across a similar situation company?
No. B/S is the financial status of the company at that point of time. I,e 31/12/09 if the financial year end at at 31 dec 09. On 1/1/10 the number will change.
As I said every company is the same if the company has subsidiary or associate. You will see the same thing for almost every listed company. The diff is due to consolidation effect.
If you don’t understand the diff then there is no point of going further.
[...] is usually a danger flag for me, but I take them as a case by case basis, since in my analysis of Starhub, debt to asset ratio is way way way worse than this yet my take of Starhub is that it is still much [...]
[...] On a group balance sheet, the total equity is 57 mil! The question is will we reached zero or negative equity??? Do take note that at the company level Total equity is at 1.1 billion. I have an old reply from Starhub’s investor relations talking about their low equity to debt situation. [...]
[...] On a group balance sheet, the total equity is 57 mil! The question is will we reached zero or negative equity??? Do take note that at the company level Total equity is at 1.1 billion. I have an old reply from Starhub’s investor relations talking about their low equity to debt situation. [...]
Thanks Drizzt! You kinda answer my burning question regarding this High Debt by Starhub.
One thing to clarify, when you’re buying shares of Starhub, are you buying the Group or the Company?
Cos if we’re buying the Group, then the huge debt will still be a problem. No matter how much Starhub Company can earn.
Now comes the other question mark, why is the company and group having so large of a discrepancy?
Since Starhub Group = (Starhub company + other subsidiaries), there is a need to investigate the other the other subsidiaries of Starhub Ltd. Frankly, this is to find how reserves could change from 984mil to -131mil.
I took some reading into the B/S and came to a realization. There’re no subsidiaries under the GROUP! Instead, it’s all under the company.
Under Note 2.2, “Subsidiaries are consolidated with the Company in the Group’s financial statements.”
All subsidiaries are under the company(re-iterated in Note 5 in 2009AR).
If this is the case, shouldn’t the company and the group have the same numbers?
hi yyt, your question is as good as mine. I always think we should be buying the group so why make it so complicated.
Starhub have indicated that they do not have a problem with that position. in fact, they are willing for it to go negative equity.
that is not much of an assurance. i have no doubt their cashflow is there.
the problem with starhub is the operation business economics. NBN does not look good for local telcos.
it looks a good prospect for the users, but not the telcos.
yeah, agreed with you, Drizzt.
NBN doesn’t look good for local telcos. The one which probably would benefit the most IMHO would be M1.
NBN sorta levels the playing field for all operators as the backbone now is “unified”, not restricting to cable or telephone cable.
The constant arguments of fixed line vs cable, shared vs dedicated can also be thrown out the window with this unification of technology.
Starhub can’t promise you a faster 1000Mbps compared to Singtel or M1. In the same breathe, neither operators can promise that.
Which distills it all down to service+package, removing the inherent advantage that starhub and singtel initially had.
Back to Starhub, I think they’re doing some accounting manipulations here, not wrong and still within legal boundaries.
But in sg, maybe there’s one overriding rule : No matter what outlook gives, if the govt backed T-Holdings is investing in it(vested or direct), you’ll prob not be disappointed, especially if they give out 8% div. lol
Anyways, great great site you have here Drizzt!
Great navigation style, relevant reports.
Your Div stock tracker is also awesome for people interested into Div investing. Thumbs up. 
precisely it will become very hard to differentiate. the more you cannot differentiate, the more it becomes a commodity business.
that means u cannot earn a good margin. sad huh……
thanks for the support. i try to see what i can to improve the lives of all dividend investor. but i think its people like you that value adds most to dividend investors then me really.
cheers.
[...] Singtel is the one that gives the lowest dividends and probably the big bad wolf. Starhub is the one which drew the most criticism because its dividends is paid out more than net profit and its debt is many times more than equity. [...]
Just curious but does anyone know why the dividend payout ratio in 2007 is so much lower than 2008 and 2009?
[...] have written time and again why Starhub’s debts is not unsustainable. [Explanation here] Starhub’s debt to equity ratio is high because their equity is very very very [...]
[...] on the Singapore Telecom Stocks have been some of the more popular articles. [Analysis here, here, here and here [...]
I hate to say this. Never do ratio by mixing group and company number. Group is the consolidated acc while company is just acc of the holding company. Look thru a few more annual reports from other companies and you will realised.
the answer to your burning question lay on the equity side of the B/S. Ie explaining the huge negative reserves.The most simple answers are 1) Starhub has been loss making for a long time. 2) Creative accounting.— I dont know but the answer can be found in the book not the ratio.